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Questions related to MBO
(1) Might be a silly one- The VC provided the finance to management (In a leveraged MBO, the management acquires the company by raising finance from outside….right?) then how the loan is considered as debt of the new company?
(2) General q related to MBO – Does MBO result in a new company as mentioned in the question?? I thought in MBO, management simply acquires the existing company
Kindly answer..Thanks
2. A new company is formed that takes over the old company.
1. The new company Is financed partly by equity and partly by the loans stated in the question.
2. Then what’s the purpose of an MBO if ultimately a new company is formed?
1. I read the question thrice but its no where written what you’ve said sir…In a leveraged buyout, “management” does not have sufficient funds to acquire the company so they take a loan(not the new company) right? The question clearly states VC has agreed to provide leveraged finance…
Then how the bonds issued are considered to be debt of the new company and not the management?Hope you got my question..
The management form a new company to buy the business from the existing shareholders. The purpose of it is that the management (who are shareholders in the new company) will then be entitled to the dividends of the new company because the current shareholders no longer exist.
To be able to afford to pay for the business they will put share capital in themselves but are almost certainly going to need additional finance to cover the cost which either means finding someone else to buy some of the shares, or in the case of a leveraged buyout find people to lend money to the new company.
2. Understood
1 So basically in a leveraged Buyout, the outsider (here the VC) provides finance by purchasing shares of the new company/ giving debt to the new company of which management are the new owners..ie the loan capital is provided by investors to the new company, not the management right ???
Whereas in normal MBO, bulk of finance required is contributed by managementHave i understood it perfectly now?
Yes, except that when it is not a leveraged buyout then the management will buy shares but the ‘outsider’ will also provide finance but by buying shares rather than giving loans.
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